Moderate easing continues! In 2026, monetary policy will focus on targeted measures, with a "flexible and efficient" approach to RRR cuts and interest rate reductions.

China Times (www.chinatimes.net.cn) Reporter Liu Jia Two Sessions Report

The 2026 monetary policy will continue the overall tone of “moderate easing.”

On March 5, Premier Li Qiang delivered the “Government Work Report” (hereinafter referred to as the “Report”) to the Fourth Session of the 14th National People’s Congress on behalf of the State Council. The Report outlined the main economic targets for 2026 and made arrangements for major macro policies and key tasks.

The Report calls for the continued implementation of a moderately easing monetary policy. It emphasizes promoting stable economic growth and reasonable price increases as key considerations for monetary policy, flexibly and efficiently using tools such as reserve requirement ratio cuts and interest rate reductions, maintaining ample liquidity, and aligning social financing scale and money supply growth with economic growth and inflation expectations. It also advocates optimizing and innovating structural monetary policy tools, appropriately increasing their scale, and improving implementation methods.

Dong Ximiao, Chief Economist at Zhaolian and Deputy Director of the Shanghai Financial and Development Laboratory, views this year as the beginning of the “14th Five-Year Plan” period. He notes that the 2026 government work report introduces new phrases and changes in the deployment of monetary policy. These changes are based on precise judgments of the current economic situation and signal a shift from focusing on “strength” to emphasizing “precision,” and from prioritizing “total volume” to focusing on “structure.”

Continuing the implementation of a moderately easing monetary policy

The Report states, “Continue to implement a moderately easing monetary policy,” consistent with the tone of the Central Economic Work Conference.

Wen Bin, Chief Economist at Minsheng Bank, believes this indicates that under the overall direction of stabilizing growth, stabilizing prices, expanding domestic demand, and strengthening fiscal-monetary coordination, the supportive stance of monetary policy remains unchanged, creating a suitable monetary and financial environment for high-quality real economy development.

At the macro level, the Report proposes to “promote stable economic growth and reasonable price increases as key considerations for monetary policy, flexibly and efficiently using various policy tools such as reserve requirement ratio cuts and interest rate reductions, and maintaining ample liquidity.”

“This suggests that reserve requirement ratio cuts and interest rate reductions remain options for this year’s monetary policy operations, but they are expected to be carefully balanced among multiple objectives, with attention to policy quality and long-term effects,” Wen Bin told China Times.

In terms of specific implementation, Wen Bin believes the central bank may increasingly use pledge-based and outright reverse repos, MLF, and open market operations involving government bonds, combining short-, medium-, and long-term liquidity tools to smooth out peaks and troughs, ensuring reasonable liquidity and stable funding rates, and stabilizing markets and expectations.

Additionally, the pace of reserve requirement ratio and interest rate adjustments will remain “flexible and efficient.”

“‘Flexible’ means decisions will be made based on domestic and international economic and financial conditions, carefully balancing policy strength and timing; ‘efficient’ means avoiding large-scale liquidity injections, ensuring that the released liquidity accurately supports the real economy, unclogs bottlenecks, and maximizes policy effectiveness,” Dong Ximiao explained to China Times. Future coordination of reserve requirement ratio cuts, interest rate reductions, open market operations, and structural tools is likely.

Notably, earlier this year, Vice Governor Zou Lan of the People’s Bank of China stated at a State Council Information Office briefing that there is still room for reserve requirement ratio and interest rate cuts this year.

Zou Lan pointed out that, based on the average statutory deposit reserve ratio of 6.3% among financial institutions, there is still space for reserve requirement ratio cuts. Regarding policy rates, externally, the RMB exchange rate remains relatively stable, and the US dollar is in a rate-cutting cycle, so exchange rate constraints are not strong overall; internally, since 2025, bank net interest margins have shown signs of stabilization, maintaining around 1.42% for two consecutive quarters. With large-scale re-pricing of long-term deposits such as three- and five-year maturities in 2026, and the People’s Bank of China lowering various re-lending rates, these factors help reduce banks’ interest costs and stabilize net interest margins, creating room for rate cuts.

Regarding the scale and timing of reserve requirement ratio and interest rate cuts, Wang Qing, Chief Analyst at Dongxing Securities, believes that based on macroeconomic and financial trends this year, after the central bank introduced a package of structural monetary policies early in the year, it is expected to make timely decisions to implement comprehensive policy rate cuts. The full-year interest rate reduction could reach 0.2 to 0.3 percentage points, with one cut in the first half and one in the second half.

“Additionally, to stabilize the real estate market, there is a possibility of targeted interest rate cuts, such as significantly lowering the five-year LPR to support residents’ mortgage loans,” Wang Qing told China Times.

Zeng Gang, Deputy Director of the National Financial and Development Laboratory and Director of the Shanghai Financial and Development Laboratory, predicts that the overall monetary policy in 2026 will focus on stabilizing growth and prices, with room for reserve requirement ratio and interest rate cuts. “In terms of timing, reserve requirement ratio cuts may be front-loaded in the first quarter, with one or two cuts throughout the year; policy interest rates could be lowered by 10-20 basis points to guide financing costs downward.”

Lou Feipeng, researcher at Postal Savings Bank, also told China Times that the Report emphasizes promoting stable economic growth and reasonable price increases. With CPI target around 2% this year and current prices relatively weak, conditions for rate cuts are favorable. The second quarter will be an important observation window; if economic and price data remain weak in the first quarter, the central bank may first use reserve requirement ratio cuts to inject long-term liquidity, and then consider moderate policy rate reductions as needed.

“Overall, in 2026, prices are expected to remain relatively low, and Fed rate cuts will ease external constraints on domestic monetary policy flexibility, providing ample room for moderate easing,” Wang Qing said.

Structural tools will be strengthened

Beyond aggregate functions, this year’s monetary policy will continue to emphasize structural functions.

The Report proposes to optimize and innovate structural monetary policy tools, appropriately increase their scale, and improve implementation methods.

It aims to smooth the monetary policy transmission mechanism, fully leverage data elements, intellectual property, and other intangible assets, strengthen assessment, financing guarantees, and risk compensation measures, and guide financial institutions to increase support for expanding domestic demand, technological innovation, and small and micro enterprises. It also calls for standardizing credit market behavior, reducing financing intermediary costs, and promoting low overall social financing costs.

“On the structural level, the Report’s proposal to ‘optimize and innovate structural monetary policy tools’ is consistent with last year’s requirements, but explicitly states the need to ‘appropriately increase scale and improve implementation methods’,” Wen Bin explained further. In fact, in January, the central bank had already introduced eight structural monetary policy measures, including structural interest rate cuts. The Report’s mention of linking support for agriculture, small businesses, and re-lending and rediscounting reflects this approach, aiming to enhance the attractiveness of structural tools, strengthen targeted support, avoid policy resource redundancy, and improve precision and efficiency.

“An explicit signal of ‘appropriate increase in scale’ indicates the central bank will inject more low-cost long-term funds into specific sectors such as technological innovation, consumption, and small micro enterprises,” Dong Ximiao added. “Improving implementation methods” refers to quality enhancement, optimizing tool design to ensure funds reach the end-users more smoothly, avoiding fund idle or diversion, and increasing efficiency.

In terms of transmission, the Report emphasizes “smoothing the monetary policy transmission mechanism.” Wen Bin said this means further consolidating and optimizing the recent monetary policy framework, improving interest rate transmission efficiency, and gradually narrowing the interest rate corridor, enhancing the pricing efficiency of government bond yields, and strengthening the linkage between loan and deposit rates and other market rates.

It is also noteworthy that the Report for the first time highlights “fully leveraging data elements, intellectual property, and other intangible assets, and strengthening assessment, financing guarantees, and risk compensation measures.” Dong Ximiao believes that traditional credit heavily relies on tangible assets like real estate and land, while many tech-based enterprises are asset-light and digitally operated, often lacking tangible collateral. The Report’s emphasis on utilizing data and intellectual property, along with supporting measures, indicates a policy shift toward building a financial system suited for new productive forces.

Furthermore, the Report states, “Standardize credit market behavior, reduce intermediary costs, and promote low social financing costs.”

Wen Bin noted that given current credit rates are already at a relatively acceptable level, protecting banks’ interest margins remains a key goal. The mention of “promoting low social financing costs” has been adjusted from last year’s “pushing down” to “maintaining at low levels.” Future reductions in financing costs will focus more on “standardizing credit market behavior and lowering intermediary costs,” including optimizing self-discipline in loan and deposit pricing and expanding the coverage of explicit corporate loan financing costs.

“Lowering financing costs is not simply about reducing loan interest rates,” Dong Ximiao explained. Previously, the overall financing cost included not only interest but also hidden costs like guarantee fees, evaluation fees, and bridging costs. The government work report’s call to “standardize credit market behavior” aims to eliminate these intermediary and hidden costs, making financing more transparent and straightforward for various entities.

Overall, Zeng Gang stated that in 2026, the overall monetary policy will focus on moderate total volume and prioritized structural adjustments, avoiding large-scale liquidity injections, maintaining reasonable liquidity, and providing a stable environment for fiscal efforts, with more flexible and efficient use of tools.